Welcome to Reaganomics 101, folks.
All Modern Conservatives agree that taxes need to be reduced so we don’t penalize people for being productive. All Modern Conservatives also agree that a balanced budget keeps America safe. So how can we reconcile the two?
Enter Arthur Laffer.
Dr. Laffer (a Stanford MBA grad!) was an economic advisor for President Reagan in the 1980s. Laffer became famous after he drew out a diagram on a napkin to explain his low-tax ideas to some colleagues. The napkin drawing looked something like this:
This graph, which we now call the Laffer Curve, is a very basic illustration of the relationship between tax rates and tax revenues. The logic behind it basically follows three rules:
- When the government taxes income at 0%, it generates no revenue. Because, um… a 0% tax isn’t a tax at all (duh).
- When the government taxes income at 100%, it earns no revenue. That would be like slave labor, and basically no one would go to work.
- There exists some point on the tax rate curve between these extremes that produces the most revenue possible (the intermediate value theorem, for you calcsters out there).
They all seem kind of obvious, but think of their implications from a political perspective. Liberals generally believe raising taxes (besides being a matter of moral fairness – which it isn’t) would raise revenue for the government. But what if we were already taxing revenue at point B on the graph below? The Laffer Curve says that raising taxes would lose the government money!
While it’s nearly impossible to tell for sure, Republicans believe we’re on the point B (taxed enough already) side of the curve, and Democrats think we’re on the point A (not taxed enough) side. That’s why Republicans want to cut your taxes, and Democrats want to raise them. I guess you could say the Laffer Curve is one of those rare instances when the Right wants to move left, and the Left wants to move right. Notice, by the way, that only one side can be correct here. And since a quick estimate of my “impoverished” teachers’ average total effective tax rate was something above 40%, I’m inclined to believe the Republicans are right.
Modern Conservatives want us to be at point “C” – the equilibrium point. Only there is the revenue maximized, thus bringing in the most money for the lowest rate. Equilibrium taxation represents our best chance to balance the budget, encourage productivity, and restore American prosperity.
For more reading on the Laffer Curve, I suggest you take a look at Mankiw’s Principles of Economics – an excellent resource on all matters economic!